ID Pecuniary Relationships

Independent Directors

Pecuniary Relationships

Are they really harmless?

InGovern Research Services

PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?

JANUARY 2016 PAGE 2

This study lists out cases where Companies have a pecuniary relationship with their

Independent Directors, mostly through the latter’s legal/consulting firms. This pecuniary

relationship extends beyond payment of sitting fees and commission, to payment of fees for

rendering professional advice which is outside the gamut of responsibilities of an Independent

Director.

HIGHLIGHTS OF THE REPORT

The Companies Act, 2013 & Clause 49 have set monetary limits (Rs. 50

Lakh, 10% of revenue of the legal firm, etc.) for such relationships

between Companies and their IDs, breaching which IDs can no more

be classified as ‘independent’.

Howard M. Schilit and Jeremy Perler, in their book “Financial

Shenanigans: How to detect accounting gimmicks & fraud in financial

reports”, highlight such pecuniary relationships as a red flag that

provides a breeding ground for shenanigans by companies.

Pecuniary relationships question the true independence of IDs as the

legal/ consulting firm draw a fee from the company and work for the

company and/or promoters.

The legal/ consulting firm no longer acts as an independent party and

hence the advice given by them can be questioned as the ID (being a

partner in the firm) may influence the advice.

Often these IDs sit on the Audit Committee or even Chair it. This raises

questions on the independence of the most important committee of the

Board which safeguards minority shareholders’ interest.

Companies often don’t disclose the fees paid to these legal/consulting

firms and just state that it is not “material”.


JANUARY 2016 PAGE 3

In S&P BSE 200 Index, 21 Companies had such a pecuniary

relationship with their IDs. These 21 Companies had pecuniary

relationships with 25 IDs. Out of these 25 IDs, 15 were members of

which 4 were Chairmen of the Audit Committee.

The 21 Companies include 6 Companies of Nifty-50 Index and 4

Companies of Nifty Next 50 Index.

The study also lists out 34 Companies which are outside the S&P BSE

200 Index.

While most of the pecuniary relationships are through the IDs legal/

consulting firms, there are also cases where the IDs have a direct

lawyer-client relationship with Promoter of the Companies.

InGovern recommends that shareholders vote AGAINST the

appointment/re-appointment of such IDs.

InGovern recommends that regulators view such pecuniary

relationships as related party transactions (RPTs) and the fee paid

should be disclosed as per RPT norms. The MCA/SEBI should change

the regulations to classify such IDs as non-independent directors.

InGovern recommends that if Companies feel necessary to continue

such relationship with ID’s legal/consulting firms while retaining the

IDs on Board, they should reclassify the IDs as non-independent

directors.


JANUARY 2016 PAGE 4

PECUNIARY RELATIONSHIPS WITH IDS –

ARE THEY REALLY HARMLESS?

The Companies Act, 2013 as well as Clause 49 of the Listing Agreement emphasize that having

a pecuniary relationship with the company, either through themselves or their firms, affects the

independence of the Independent Directors.

Section 149(6) of the Companies Act, 2013 states,

“An independent director in relation to a company, means a director other than a managing

director or a whole-time director or a nominee director…

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or

associate company, or their promoters, or directors, during the two immediately preceding

financial years or during the current financial year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company,

its holding, subsidiary or associate company, or their promoters, or directors, amounting to two

per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher

amount as may be prescribed, whichever is lower, during the two immediately preceding

financial years or during the current financial year;”

(e) who, neither himself nor any of his relatives…

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years

immediately preceding the financial year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company

or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its

holding, subsidiary or associate company amounting to ten per cent. or more of the

gross turnover of such firm;”

Clause 49 of the Listing Agreement states,

“For the purpose of the clause A, the expression ‘independent director’ shall mean a non-

executive director, other than a nominee director of the company:

c. apart from receiving director's remuneration, has or had no material pecuniary relationship

with the company, its holding, subsidiary or associate company, or their promoters, or

http://ca2013.com/149-company-to-have-board-of-directors/


JANUARY 2016 PAGE 5

directors, during the two immediately preceding financial years or during the current financial

year;

d. none of whose relatives has or had pecuniary relationship or transaction with the company,

its holding, subsidiary or associate company, or their promoters, or directors, amounting to two

per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher

amount as may be prescribed, whichever is lower, during the two immediately preceding

financial years or during the current financial year;

e. who, neither himself nor any of his relatives…

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years

immediately preceding the financial year in which he is proposed to be appointed, of —

(A) a firm of auditors or company secretaries in practice or cost auditors of the company

or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its

holding, subsidiary or associate company amounting to ten per cent or more of the gross

turnover of such firm;”

********************************************

The Act as well as the Listing Agreement, has defined limits over which independence will be

disqualified. These limits are:

a. No direct relationship with the company

b. No relationship with auditors/ company secretaries/ cost auditors associated with the

company

c. No pecuniary relationship through relatives where transaction value exceeds 2% of

income of the company or Rs. 50 lakh, whichever is lower

d. No pecuniary relationship through legal/consulting firm where transaction value

exceeds 10% of total income of the legal/consulting firm.

Access the complete Section and the Rule in the website www.ca2013.com “The Companies Act Integrated Ready Reckoner - CAIRR”

http://www.ca2013.com/

http://ca2013.com/149-company-to-have-board-of-directors/


JANUARY 2016 PAGE 6

Is Pecuniary Relationship necessary at all?

Although, in many instances, the fees/ transaction amounts may not exceed the limits as set out

by the regulations, the very fact that there exists a pecuniary relationship between a Company

and its Independent Director raises serious concerns on the independence of the director. Such a

relationship may adversely influence an Independent Director’s objectivity when it comes to

taking key decisions and also results in conflict of interest of the concerned director.

In their popular book titled, “Financial Shenanigans: How to

detect accounting gimmicks & fraud in financial reports”,

authors Howard M. Schilit and Jeremy Perler highlight

pecuniary relationships of Independent Directors with the

companies as one of the important red flags that provide a

breeding ground for shenanigans.

The authors, citing an example of Mr. Krishna Palepu - who was

an Independent Director on the Board of Satyam while also

providing professional services to the company – state that

receiving remuneration for providing professional services to

the company would cloud an outside director’s objectivity and

appearance of independence. They also emphasize that independent directors should not

be involved in such related-party arrangements, as it may impair their objectivity and the

appearance of independence on important decisions.

Some of the biggest concerns that arise due to such relationships are:

Pecuniary relationships question the true independence of Independent Directors as the

legal/ consulting firm will draw a fee from the company and will be working with the

management.

The legal/ consulting firm no longer acts as an independent party and hence the advice

given by them and any valuation done can be questioned as the ID (being a partner in the

firm) may influence the advice.

Companies often don’t disclose the fees paid to these legal/ consulting firms and just state

that the fee paid is not “material”.

Often these IDs sit on the Audit Committee or even Chair it. This raises questions on the

independence of the most important committee on the Board.


JANUARY 2016 PAGE 7

This report lists out companies forming part of S&P BSE 200 Index that have a pecuniary

relationship with their IDs apart from payment of sitting fees and commission.

Points to note…

The study contains companies from S&P BSE 200 index which have a pecuniary

relationship with their IDs apart from payment of sitting fees and commission.

Six companies from the Nifty 50 Index and four companies (i.e., 8%) from Nifty Next 50

Index have had such a relationship with their IDs.

The S&P BSE 200 Index contains 21 companies that have had such a relationship with

their 25 IDs.

The ID with most pecuniary relationships is Mr. R. A. Shah whose firm Crawford Bayley

& Co. acted as a solicitor to the companies. Crawford Bayley & Co. has had pecuniary

relationships with 14 companies where Mr. Shah acted as an Independent Director for

the whole or part of FY15. This included two companies of Nifty 50, one of Nifty Next 50

and five companies overall of S&P BSE 200 Index.

Other IDs with most number of pecuniary relations with their Boards are Mr. Darius E.

Udwadia (Partner of Udwadia Udeshi & Argus Partners), Pradip Kumar Khaitan

(Partner of Khaitan & Co.) and others.

Some of the Directors in this study do not have a direct pecuniary relationship with the

company through their firms. However, they act as a legal advisor to or have

represented the Promoters of the Companies where they serve as an Independent

Director. Such a relationship also questions their independence on the said companies.


JANUARY 2016 PAGE 8

Name of the

Company Name of the ID Name of Firm

Type of

Firm

Audit

Comm

Nifty 50 Companies that have a pecuniary relationship with ID’s legal firm

Ambuja Cements# Haigreve Khaitan Khaitan & Co. Law firm No

Asian Paints* R. A. Shah Crawford Bayley & Co. Solicitors No

Hindalco* C. M. Maniar Crawford Bayley & Co. Solicitors No

Lupin R. A. Shah Crawford Bayley & Co. Solicitors No

M&M Ravindra Kulkarni Khaitan & Co. Law firm Member

Reliance Industries M. L. Bhakta Kanga & Co. Solicitors No

Nifty Next 50 Companies that have a pecuniary relationship with ID’s legal firm

Colgate Palmolive R. A. Shah Crawford Bayley & Co. Solicitors Chairman

Exide Industries Mona Ninad Desai AH Parpia & Co. Solicitors Member

Glenmark Pharma Sridhar Gorthi Trilegal Solicitors Member

Siemens@ Darius C. Shroff Crawford Bayley & Co. Solicitors No

Other S&P BSE 200 Index Companies that have a pecuniary relationship with ID/ ID’s firm

ABB India# Darius E Udwadia Udwadia Udeshi &

Argus Partners Law firm Member

ABB India# Renu Sud Karnad Lafarge India Pvt. Ltd. Pvt Cos. Member


JANUARY 2016 PAGE 9

Name of the


Type of

Firm

Audit

Comm

Apollo Tyres Pallavi Shroff

Amarchand &

Mangaldas & Suresh A

Shroff & Co.

Solicitors No

Apollo Tyres Akshay Chudasama J. Sagar Associates Solicitors Member

Century Textile and

Industries Yazdi P. Dandiwala

Mulla & Mulla & Cragie

Blunt & Caroe Solicitors Chairman

CESC Pradip Kumar Khaitan Khaitan & Co. Law firm No

DLF Rajiv Krishan Luthra Luthra & Luthra Law

Offices Law firm No

DLF K.N. Memani (Name not disclosed)

Chairman

Emami Pradip Kumar Khaitan Khaitan & Co. Law firm No

Jindal Steel & Power Haigreve Khaitan Khaitan & Co. Law firm Member

P&G Hygiene and

Health Care@ R. A. Shah Crawford Bayley & Co. Solicitors Chairman

P&G Hygiene and

Health Care@ B. S. Mehta Bansi S. Mehta & Co. CA Firm Member

Reliance Power D. J. Kakalia Mulla & Mulla & Cragie

Blunt & Caroe Solicitors Member

Torrent

Pharmaceuticals Haigreve Khaitan Khaitan & Co. Law firm Member

Wockhardt* R. A. Shah Crawford Bayley & Co. Solicitors Member

* The Person served as an Independent Director on the Board for a part of FY15

# FY14 annual reports of these companies have been referred to since FY15 annual reports aren’t available yet

@ These companies had made disclosures of pecuniary relationships with their IDs in their annual report of FY11.

Since then, no such disclosures have been made.


JANUARY 2016 PAGE 10

We also include a list of other companies outside the S&P BSE 200 which engage their IDs in

such a relationship. Please note that the below is not an exhaustive list.

Name of the


Type of

Firm Audit Comm

Abbott India R. A. Shah Crawford Bayley & Co. Solicitors Member

Alok Industries Ashok Rajani (Name not disclosed) Pvt Entity Member

AstraZeneca Pharma

India Darius E. Udwadia

Udwadia Udeshi and

Argus Partners Law Firm Member

BASF India R. A. Shah Crawford Bayley & Co. Solicitors Member

Bhansali Engineering

Polymers B. S. Bhesania



Bharat Bijlee Prakash V. Mehta Malvi Ranchoddas &

Co. Solicitors Member

Bombay Burmah

Trading Corp Darius E. Udwadia

Udwadia Udeshi and


Bombay Dyeing And

Mfg. Co. R. A. Shah Crawford Bayley & Co. Solicitors Member

Century Enka@ Bansi S. Mehta Bansi S. Mehta & Co. CA Firm Member

Century Enka* R. A. Shah Crawford Bayley & Co. Solicitors Member

Chowgule

Steamships Ravindra Kulkarni Khaitan & Co Law Firm No

Clariant Chemicals* R. A. Shah Crawford Bayley & Co. Solicitors Chairman

Elantas Beck India# Suresh Talwar Talwar Thakore &

Associates Solicitors Member

Electrosteel Castings Pradip Kumar Khaitan Khaitan & Co Law Firm Member

Entertainment

Network India Ravindra Kulkarni Khaitan & Co Law Firm Member

Gillanders Arbuthnot

& Company* Pradip Kumar Khaitan Khaitan & Co Law Firm No

Gillanders Arbuthnot

& Company Sucharita Basu De Khaitan & Co Law Firm Member

Godfrey Phillips

India* C. M. Maniar Crawford Bayley & Co. Solicitors Member

Godfrey Phillips

India Lalit Bhasin Bhasin & Co. Law Firm Chairman

Godfrey Phillips

India R. A. Shah Crawford Bayley & Co. Solicitors Member



Name of the


Type of

Firm Audit Comm

Graphite India Pradip Kumar Khaitan Khaitan & Co Law Firm No

Gujarat Alkalies &

Chemicals Pallavi Shroff

Amarchand &


Shroff & Co.

Solicitors Member

Hathway Cable &

Datacom Sridhar Gorthi Trilegal Solicitors Chairman

Hindustan

Construction Co. D. M. Popat



India Glycols Pradip Kumar Khaitan Khaitan & Co Law Firm Member

Ingersoll-Rand India Darius C. Shroff Crawford Bayley & Co. Solicitors Member

Ingersoll-Rand India Hemraj C. Asher Crawford Bayley & Co. Solicitors Chairman

ITD Cementation

India# Darius E. Udwadia

Udwadia Udeshi and


JM Financial Darius E. Udwadia Udwadia Udeshi and

Argus Partners Law Firm No

MPS Darius E. Udwadia Udwadia Udeshi and


Pfizer India R. A. Shah Crawford Bayley & Co. Solicitors Chairman

Ravalgaon Sugar

Farm Yazdi P. Dandiwala



RPG Life Sciences* R. A. Shah Crawford Bayley & Co. Solicitors No

Saregama* Pradip Kumar Khaitan Khaitan & Co Law Firm No

Schrader Duncan* R. A. Shah Crawford Bayley & Co. Solicitors No

Trident Pallavi Shroff

Amarchand &


Shroff & Co.

Solicitors No

Visa Steel* Pradip Kumar Khaitan Khaitan & Co Law Firm No

Wabco India Darius E. Udwadia Udwadia Udeshi and


Zuari Agro Chemicals Marco Wadia Crawford Bayley & Co. Solicitors Chairman

* The Person served as an Independent Director on the Board for a part of FY15

# FY14 annual reports of these companies have been referred to since FY15 annual reports aren’t available yet

@ These companies had made disclosures of pecuniary relationships with their IDs in their annual report of FY11.

Since then, no such disclosures have been made



Other Observations

1. Siemens: Mr. Darius C. Shroff, ID is a Senior Partner at Crawford Bayley & Co. The annual

report of 2011 of Siemens stated that Crawford Bayley & Co. had a professional relationship

with Siemens during the year. There is no such statement in subsequent annual reports of

Siemens.

2. Emami: Mr. Pradip Kumar Khaitan, ID is a Senior Partner at Khaitan & Co. Although the

annual report of Emami doesn’t list Khaitan & Co. as a solicitor or legal advisor, the firm has

acted as a legal adviser for Emami for an acquisition during this current financial year.

3. Jindal Steel & Power: Mr. Pradip Kumar Khaitan, ID is a Senior Partner at Khaitan & Co.

Although the firm has no pecuniary relationship with the company, it has acted as a legal

advisor to the promoter of the company in the recent past.

4. P&G Hygiene & Healthcare: Mr. R. A. Shah, ID is a Senior Partner at Crawford Bayley & Co.

and Mr. B. S. Mehta is the Chief Mentor of Bansi S. Mehta & Co. The annual report of 2011

of P&G disclosed the professional relationships between the company with these firms.

There is no such statement in subsequent annual reports of P&G.

5. Reliance Power: Mr. D. J. Kakalia, ID is a Partner at Mulla & Mulla & Craigie Blunt & Caroe.

Although the firm has no pecuniary relationship with the company, it has acted as a legal

advisor to the promoter of the company in the recent past.

6. Century Enka: Mr. Bansi S. Mehta, ID is the Chief Mentor of Bansi S. Mehta & Co. The

annual report of 2011 of Century Enka disclosed the professional relationship between the

company with the firm. There is no such statement in subsequent annual reports of Century

Enka.



Independent Directors with pecuniary relationship with multiple companies

There are many Independent Directors who were in such a relationship, through their firms,

with not one but multiple companies. Some of these Directors had such relationship with their

companies in almost, if not all, the companies on whose Boards they served as an Independent

Director in whole/part of FY15.

A list of a few such directors are:

Name R. A. Shah

Firm Crawford Bayley & Co.

Companies where such Pecuniary Relationship existed: 14

Asian Paints* Lupin

Colgate Palmolive Procter & Gamble Hygiene and Health Care@

Wockhardt* Godfrey Phillips India

Abbott India Pfizer India

BASF India RPG Life Sciences*

Bombay Dyeing and Mfg. Co. Schrader Duncan*

Century Enka* Clariant Chemicals*

* Served as an Independent Director on the Board for a part of FY15

Name Pradip Kumar Khaitan

Firm Khaitan & Co.


CESC Emami

Electrosteel Castings India Glycols

Gillanders Arbuthnot & Company* Saregama*

Graphite India Visa Steel*

* Served as an Independent Director on the Board for a part of FY15

Name Darius E Udwadia

Firm Udwadia Udeshi & Argus Partners


ABB India JM Financial

AstraZeneca Pharma India MPS

Bombay Burmah Trading Corp Wabco India

ITD Cementation India



Name Ravindra Kulkarni

Firm Khaitan & Co.


M&M Chowgule Steamships

Entertainment Network India

Name Haigreve Khaitan

Firm Khaitan & Co.


Ambuja Cements Jindal Steel & Power

Torrent Pharmaceuticals

Name Pallavi Shroff

Firm Amarchand & Mangaldas & Suresh A Shroff & Co.


Apollo Tyres Gujarat Alkalies & Chemicals

Trident

Conclusion

We understand the directors stated in this study are persons of vast knowledge, experience and

reputation. We also understand that the companies benefit immensely from these directors’

presence on their Board. However, pecuniary relationships, apart from sitting fees and

commissions, severely violates the independence of the concerned Independent Director.

Hence, it is recommended that companies should enter into no professional relationship with

either their Independent Directors or the legal/consulting firms where the Independent

Directors are owner/partners/employees, etc. In case companies think it is necessary to retain

the professional services of the firm as well as the concerned directors, the Independent

Directors should be classified as Non-Independent Directors. The regulations should also be

changed by MCA/SEBI to classify these relationships as RPTs and with greater disclosures.



Disclaimer

This report is proprietary and may not be reproduced in any manner without the written permission of

InGovern Research Services Pvt. Ltd. (“InGovern”). While we have taken due care and caution in the

compilation and presentation of the information and data in this report, no warranty is made as to the

completeness, accuracy or utility of this analysis.

Shriram Subramanian

Founder & Managing Director

[email protected]

080-42279150

Soumya Dash

Associate

[email protected]

080-42279150

©InGovern Research Services Private Limited

Bangalore, India

www.ingovern.com

http://www.ingovern.com/

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